May 6 (Bloomberg) -- At a time when department stores are
chopping themselves into mini-malls -- J.C. Penney Co. being the
most prominent example -- Barneys is doing the opposite.

Chief Executive Officer Mark Lee’s vision for Barneys New
York Inc. is art gallery meets luxury emporium -- airy spaces
where $1,575 Proenza Schouler bags seem like precious artifacts.
The Gucci alum wants to broaden Barneys’s appeal while
respecting its heritage as the most exclusive and avant-garde of
America’s stores. The closely held New York-based chain is
making money again and had record sales last year, said Lee, who
took over the job in 2010.

“It is good to be a niche in today’s world,” said Lee,
50, who personally scours Paris ateliers for new designers.

Lee’s makeover has gotten a lift in part because resurgent
stock markets have given wealthy consumers the confidence to go
shopping. Nordstrom Inc.’s sales at stores open at least a year
jumped 7.3 percent in 2012, more than double the 2.7 percent
rate posted by discounter Target Corp. Nordstrom dropped 0.2
percent to $58.09 in New York today, while Target retreated 0.7
percent to $70.03.

Barneys has been a mirror of the U.S. society -- and
economy -- since it was founded as a cut-rate men’s store in
1923. It added a women’s department in the 1970s, was the go-to
store for newly rich young bankers in the 1980s, went bankrupt
in the 1990s, reemerged and then expanded too abruptly in the
aughts. It fell under the control of Arab wealth and then a
hedge fund.

Barneys earnings before interest, tax, depreciation and
amortization grew 40 percent in each of the past two years, Lee
said. It was negative in 2009. His goal is to surpass Barneys’s
record Ebita of 2007.

Sales Target

The company’s near-term sales target is $1 billion,
according to a person familiar with the figures. Sales hit $800
million in 2012, exceeding 2007’s previous peak of $750 million,
said the person, who requested anonymity because the matter is
private.

For Lee to succeed long-term, he must appeal to a wider
audience without becoming mainstream like Saks Inc. or Neiman
Marcus Group Inc. So far, the strategy “seems to be working,”
said Michael Appel, founder of Appel Associates LLC, a Purchase,
New York-based consulting firm.

“It’s not an easy thing, as we know from J.C. Penney, to
have a vision and do it,” he said.

When Lee joined Barneys, the chain was still owned by
Istithmar World PJSC, a Dubai sovereign wealth fund, which had
bought it from Jones Group Inc. in 2007 at the pre-recession
peak of the luxury goods boom. Like Saks, also based in New
York, and Dallas-based Neiman Marcus, which also owns Bergdorf
Goodman, Barneys struggled in the wake of the financial crisis
and recession. Making matters worse, Barneys was crippled with
debt, had over-expanded and had gone two years without a CEO.

Fashion World

Lee arrived with 20-plus years of fashion world experience,
having worked at Saks, Giorgio Armani SpA, and at Yves Saint
Laurent and Gucci, both owned by France’s PPR SA. He was no
stranger to Barneys and “vividly” recalls the iconic, since-closed 17th Street store when he moved to New York from San
Francisco in the 1980s to study acting and cinema at New York
University. He said he has a “great respect for the golden era
of Barneys,” and one of his first acts as CEO was to pore over
the chain’s archives.

In the first few months, Lee installed his own team,
tapping, among others, another Gucci veteran, Daniella Vitale,
who is in charge of women’s merchandise. He began the work of
honing his designer roster.

“I am a merchant at heart,” he said.

Flagship Stores

Lee shuttered the Dallas Barneys in February, bringing the
chain’s number of flagship stores down to eight from nine when
he took over, and is looking for a downtown Manhattan location.
He is closing the more-accessibly priced CO-OP chain, which had
17 stores, converting the best locations to the Barneys name.
The main Barneys still sell CO-OP merchandise on designated
floors.

Hedge-fund manager Richard Perry’s acquisition of a
majority stake in Barneys about a year ago wiped out most of the
chain’s $590 million in debt and allowed Lee to accelerate his
plans. He speeded up the renovation of the 20-year-old, 250,000
square-foot Madison Avenue flagship, with the main floor slated
for completion in the coming months. He plans to redo the
Beverly Hills and Seattle stores, too.

Smallish Brands

One of Lee’s innovations is “xo,” or exclusively ours,
which focuses on smallish brands with less than $1 billion in
sales, such as Valextra SpA, a Milan-based design house that
makes leather goods, and Walter Steiger, the Geneva-born shoe
designer, who is giving Barneys a jump on a new men’s shoe line.

“Once you get to $2 billion, $3 billion, $4 billion, they
are not Barneys brands,” Lee said.

You won’t find branded shop-in-shops of the type
unsuccessfully touted by J.C. Penney’s recently fired CEO, Ron
Johnson. You won’t see in-your-face Versace bling or Louis
Vuitton logo bags. You won’t encounter often dowdy brands such
as Eileen Fisher that fall between contemporary and designer
collections. Rarely will you come upon a designer’s cheaper
secondary line such as Michael Michael Kors.

Lee also is trying to make Barneys friendlier to couples.
To make it easier for them to shop together, he has placed the
men’s and women’s shoe departments next to each other on a new
fifth floor at the New York flagship, and created new
passageways elsewhere in the store. He showcases strong dual-gender brands like Balenciaga, Givenchy and Bottega Veneta.

Relaunched Website

He relaunched Barneys’ website in May 2012 and says it’s
now Barneys’s fastest growing sales channel. Not long ago, the
industry-lagging site didn’t even have a search function.

Grace Ehlers, an analyst with Robin Report, an industry
newsletter, said the new Barneys is watered-down, impersonal and
soulless, where it had been edgy, intimate and witty.

“It may be working from a commercial standpoint,” Ehlers
said in a telephone interview. “It may not be from the long-term value of the brand.”

Lee disputes that Barneys has lost its indie cred. He makes
no apologies for carrying more conspicuous leather goods --which
have more than doubled the main floor’s sales per square foot to
$9,000 -- and has taken pains to retain some of the old while
bringing in the new.

While he replaced longtime creative director Simon Doonan
in that role, he retained him as ambassador-at-large. Another
case in point is the flagship’s windows, which over the years
have featured such irreverent displays as a Sigmund Freud
lookalike standing in for Santa Claus. Lee devoted the windows
to Lady Gaga for the 2011 holidays.

“That is a big part of the DNA,” Lee said. “But it can’t
be one tone. I don’t think that everything can be a laugh
riot.”